Shanghai's New Cabotage Laws A Disappointment

Cabotage regulations for cargo moving to and from Shanghai have been formally liberalized. Whilst this should be positive for the port’s transhipment activity, the effect is likely to be limited.

As a by-product of the establishment of the new China (Shanghai) Pilot Free Trade Zone concept, foreign-registered vessels are now officially able to carry containers between Shanghai and other Chinese ports – albeit that the vessels still have to have Chinese owners. Previously the formal position was that this could only be done by Chinese owned, Chinese flagged vessels thereby preventing the use of, amongst others, COSCO’s and CSCL’s foreign flagged ships – in theory.

This apparent change to the rules has fueled speculation in some quarters that Shanghai’s transhipment activity could increase significantly as a result. However, the reality is that the “relaxation” of the cabotage rules actually only brings formal regulation to what was already happening in practice. In addition, the China (Shanghai) Pilot Free Trade Zone, whilst new, only adds to existing Free Trade Zones in Shanghai’s Yangshan port and Pudong airport – in other words the Free Trade zone concept is not new in Shanghai.

At present, Shanghai does have a significant amount of transhipment activity. It is not an easy function to measure as official “transhipment” statistics include a very substantial volume of river barge traffic handled at the port, but focusing only on seagoing-vessel to seagoing-vessel transhipment, Drewry estimates that this was around 17% of the port’s total throughput in 2012. Due to Shanghai’s sheer scale, this equates to a large absolute number – 5.5 million teu. The recent formalization of the cabotage laws will have a positive impact on this, but it is likely to be limited. This is partly because there is little change to what already happens in practice but more importantly because there are other, wider factors at work which mean that Busan, the leading transhipment hub in the region and a major port for serving Chinese Bohai Rim feeder ports, is likely to remain dominant.

Busan’s 8.4 million teu of transhipment in 2012 makes it by far the largest hub port in the Northern China/Korea/Japan region. Its success is based on a number of factors not least the fact that foreign owned and flagged feeder vessels can serve Chinese ports. Busan also has a favorable location allowing first port of call inbound and last outbound for trans-Pacific routings. Bureaucracy also plays a part (Chinese ports and shipping remain heavily burdened by paperwork) as does tax policy (Chinese exporters cannot claim export tax refunds until their goods leave the final Chinese port).

There is one other key factor which impacts on Shanghai’s potential to significantly increase its transhipment activity – the huge scale of the port. If for example Shanghai’s seagoing-vessel to seagoing-vessel transhipment incidence increased to say 30% of total throughput (still well below Busan’s near 50%), this would add millions of teu p.a. to the port’s activity. With utilization levels in Shanghai terminals already typically well above 80%, massive investment in new capacity would be required to accommodate the extra transhipment business. The feasibility, and perhaps more importantly the profitability of doing this is questionable. Being a huge, highly utilized gateway container port means that in one sense, Shanghai is a victim of its own success.

How the change to the cabotage rules will affect Chinese domestic cargo moving between Shanghai and other Chinese ports (as opposed to deep-sea traffic transhipped in Shanghai), is outside the scope of this analysis. This cargo often moves between smaller ports and terminals, situated closer to the inland points where the cargo is ultimately destined for or originates from, and so is less attracted to deep-sea terminals. In Shanghai for example, many coastal vessels prefer to call at its inner Waigaoqiao terminals, which are situated a long way away from the modern deep-water terminals in Yangshan.

Overall View

The establishment of Shanghai’s Free Trade Zone (FTZ) and the associated relaxation of cabotage rules should have a positive impact on the port’s seagoing-vessel to seagoing-vessel transhipment activity, but the effect is likely to be limited. Busan’s dominant role in the region as a hub serving Northern Chinese feeder ports looks set to remain, at least for the time being.